So you might think we see eye to eye on this issue, but that would be a rash assumption. While I see a giant new tax as a dangerous step on the road to serfdom, Josh thinks it’s a necessary and desirable reform.

…it is time to reconsider a VAT. It would be both substantively better and more politically palatable. Here’s why: A value-added tax raises a ton of money. The base (the total amount of goods that would be subject to tax) would range from one-third to one-half of gross domestic product. U.S. tax revenue, meanwhile, is running well below the long-term trend — by about 3 percent of GDP. A 10 percent VAT with a relatively broad base could raise $750 billion a year, enough to pay for about a fifth of the federal budget.

This is the point where I could make a snarky comment about how I want to cut “a fifth of the federal budget, ” not figure out how to pay for it, but that would take away from much more important concerns.

What really worries me about a VAT is that it will enable politicians to increase the burden of government spending. And that’s not good for the economy, regardless of whether that new spending is financed by the VAT, by income taxes, by borrowing, or by energy taxes. Heck, even if the spending is financed by little green men from outer space, more government spending will undermine prosperity by causing resources to be allocated to less productive uses.

I also think Josh is a bit naive in thinking that a VAT will enable reductions to other taxes. The European experience suggests that VATs are associated with higher tax burdens of income and profits (in part because VAT increases are matched with class-warfare tax hikes to make sure “the rich” pay their fair share).

I touch on some of these issues in this short video on the value-added tax.

I’ll close with a rhetorical question that helps explain my skepticism: We know that entitlement reform is desperately needed to save America from becoming like Europe, but do we think such reform will be more likely or less likely if politicians are given a new tax that generates lots of revenue and is easy to raise because the cost is hidden from taxpayers?

10 Responses

Only in the Bizzaro World of the left does one promote the idea of goosing sluggish private sector consumption with government ‘stimulus’, then turn around and tax the consumption to pay for the deficits caused by the stimulus!

Of course, if you’re in Washington, and get a slice of they money each way, it works out great. For you.

I do not know about other people but I am left speechless when government says that VAT is a good tax as it broadens the tax base and fetches more revenue. They actually look dignified when they give such statements. Don’t they feel bereft of dignity when saying such things. Either they are shameless or they don’t have this simple understanding that other people’s money is not theirs. They should be ashamed every time they ask for a single extra penny from people.
Not to mention that every form of tax penalizes capital and productive behavior, gives more money in the hands of government to splurge on wasteful machinery. Now if there are huge deficits, shouldn’t they reduce the spending, why give the bill to people to cover up for their inefficiencies. Also, it seems like VAT (or any other form of high taxation) and growth do not go together in different countries through time, yet politicians are so keen on doing the same thing. Unbelievable!

The experience in Australia was quite different. It has raised billions, indeed billions more than expected. However, by 18 months after our GST was introduced, people got used to it and it barely causes any political comment. the only political means to introduce it was to remove existing federal sales tax and some state taxes and to cut personal income tax rates. That meant the increased total tax take was initially small but grew each year as personal spending grew.

Eliminate income and most Buisness taxes and replace with a national sales tax. With it’s own flaws it would at least make everyone a tax payer, bringing home to the poor the reality of what they are already paying in hidden taxes

[…] that is being used to finance government debt. That’s only true, though, if you’re naive enough to think politicians won’t spend the new revenue. Good luck with that. Daniel J. Mitchell • June 29, 2012 @ 11:31 am […]

[…] for a VAT from people such as Tom Dolan, Greg Mankiw, and Paul Ryan, as well as Kevin Williamson, Josh Barro, and Andrew Stuttaford. And I wrote that Mitch Daniels, Herman Cain, and Mitt Romney were not […]